What is the internal rate of return (IRR)?

The internal rate of return (IRR) is a crucial financial metric used to evaluate investment opportunities. It represents the discount rate at which the net present value (NPV) of an investment's cash flows equals zero. This means that when future cash flows of an investment are discounted back at the IRR, they precisely offset the initial investment cost, resulting in no net gain or loss.

This concept is vital for investors as it helps in comparing the potential profitability of different investments or projects. When deciding whether to proceed with a project, if the IRR exceeds the required rate of return or cost of capital, the investment is generally considered acceptable.

Other options do not accurately capture what IRR represents. While profit and expected growth are relevant factors in investment assessments, they do not define IRR itself. Similarly, the cost of capital pertains to the minimum return required by investors, which is a different metric. Understanding that IRR specifically focuses on the point where NPV becomes zero is essential for accurate financial analysis.